should I cash in my Roth IRA to pay down my mortgage?

Question

I am 50 years old and still have 27 years left on the mortgage. I want to retire at 62 or 65 without a mortgage. My mortgage balance is 270K my Roth account is 40K. I have been accelerating the principle payment on my mortgage and will have it paid off in 10 years. If I were to cash out my Roth IRA the mortgage will be done in 8 years.

Answer 1

You should not for a simple reason. The after tax cost on your mortgage is a lot lower than the return on your Roth IRA. You are making tons of money on the spread between the two. Keep it that way.

Let's say your mortgage rate is 6% and that you are in the 33% income tax bracket when combining Fed and State tax. Your resulting mortgage after tax costs you only:
6% (1 - 33%) = 4.0%.

Meanwhile, the long term return on your Roth IRA should be substantially more than that. It could easily be 8.0% and still be associated with moderate risk. A mutual fund with 60% in stocks and 40% bonds would get you there.

So to borrow at 4% and invest at 8% is an ideal situation. And, it is a good way to increase your wealth.

In view of the above, to pay off your mortgage with Roth IRA funds would be foolish.

If you need further clarification, you are welcome to contact me through "Answer."

Answer 2

I would suggest avoiding it if you can. There are penalties for withdrawing money early out of the Roth IRA. I believe the penalty is only on whatever gains you have made in the IRA (since you've already paid taxes on the money before you put it into the Roth IRA) but the penalty is there none the less.

Besides that, you're losing that money in retirement. Will saving two years on your mortgage make up for the retirement income lost? Only you can answer that.

Answer 3

There is no tax due on a withdraw of principal from a Roth IRA, but there may be taxes due on earnings and penalty for early withdraw. Seek a financial advisor at the company where your IRA is invested. There are calculations that can be made to factor in all the contingencies. Whatever posessed you to take out a huge mortgage this close to retirement??

Answer 4

Never a good idea. If you crack the Roth IRA, you will not end up with the 40K in it because you will be penalized for going into it and the taxes will be based on early withdrawal plus the amount of withdrawal plus your wages for that year will boost you to a new income bracket taxwise and you'll feel a minimum of a 12,000 loss on that 40K in taxes alone. Suze Orman just covered this and it's in her book. Never, ever wise to crack into your Roth or 401K to pay down a mortgage...it's just not giving you the best bang for your buck. Her book does cover some other options and it's really worth reading. I'm sure they have a copy at your local library.

Answer 5

I would say, not now. If you start withdrawing from your Roth IRA before age 59 and a half, you get hit with taxes and penalties. Leave things as they are for now, but think about it again, when you are about 60.

Answer 6

I thought no when i 1st saw your ?. after reading the 3 prior answers its still a no... But it all depends what your current $ needs are vs. your predicted retirement income I guess.. If you have a solid retirement income regardless, then maybe paying off your mrtg 2 years earlier will save you more in interest than what the IRA will have given you...weigh those pros/cons and its still a tough decision....

Answer 7

For Roth IRA: withdraw on your contributions at any time is penalty-free

withdraw on earnings after age 59.5 is penalty free, if under 59.5, 10% penalty unless it's on your first home (penalty free on the first 10,000) or postsecondary education expenses or IRS payments or medical expenses

so you are safe on taking whatever amount you contribute + 10,000 of the earnings if it's your first home

Answer 8

no -- you will have a 50% tax to pay on the early withdrawl